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The Complete Guide to SBA Working Capital Loans: Everything to Know

Published July 5th, 2022 by Cornerstone Capital Advisors

A worrying 29% of small businesses fail due to a lack of capital. 

That lack of capital means it's nearly impossible to keep up with day-to-day expenses. Luckily, however, there are quite a few loans out there made to help small businesses pull through tough times. 

One of the most popular ones is the SBA Working Capital Loans. 

Let's take a look at what they are, who is eligible for them, and how to apply for one.  

What Are Working Capital Loans?

A working capital loan helps small business owners pay for day-to-day expenses such as rent payments, debt payments, payroll coverage, and the purchase of vital inventory. 

For seasonal businesses, this can be particularly useful. Some extra working capital can help keep everything functioning in the off-season, so you can rake in profits during the peak season. 

There are a variety of different kinds of working capital loans. The following four are the most common: 

  • term loans (for upfront lump-sum payments)
  • business lines of credit (for drawing money as needed)
  • invoice financing (for borrowing money based on customer orders)
  • SBA Working Capital Loans

All four can provide short-term loans to pay for daily expenditures.

What Are SBA Working Capital Loans?

SBA Working Capital Loans are specific kinds of working capital loans that come in three main varieties:

  • 504 loans for fixed assets up to $5 million
  • Microloans for working capital up to $50,000
  • 7(a) loans for working capital up to $5 million

Of the three, the 7(a) loans are by far the most popular. 

Regardless of which one you choose, each loan is backed with a guarantee by the U.S. Small Business Association (SBA). This guarantee means the SBA will pay up to 85% of the loan to the loan provider if the borrower defaults on the payment.

Since the SBA doesn't provide the loans itself, it needs to work with those who do — namely, traditional banks, credit unions, and online lenders.

In the past, most of these lending partners thought small business loans were too risky. However, with the SBA backing, they're more likely to take that risk. 

To justify the guarantee, however, the SBA often requires the small business borrower to offer up collateral that they can seize if they default on payments. Alongside that, anyone who has a 20% stake in the company has to offer up something as well. 

Who Qualifies for SBA Working Capital Loans?

SBA Working Capital Loans are not for everyone. To determine if your business is eligible, it needs to meet a set of criteria set out by the SBA. 

In particular:

  • be a for-profit small business
  • be registered and physically located in the U.S. 
  • exhaust other financial options 
  • show a reasonable amount of invested equity
  • prove the funds are for business purposes 

If you pass the eligibility requirements, then you can move on to the loan application process. 

How to Apply for SBA Working Capital Loans

The SBA loan application process can get a bit complex. However, we've simplified it into five easy steps. Let's take a look. 

1. Define Business Needs

As we saw above, there are plenty of ways to raise capital for your business. This can range from business lines of credit or business credit cards to term loans and microloans. 

Before finding the right loan, it's important to determine how you'll use the money. If you plan on using it to start a new business or fund future growth, then SBA Working Capital Loans are not your best bet.

However, if you've exhausted other financial options and need to maintain day-to-day expenses for your pre-existing business, then an SBA Working Capital Loan can help.

2. Check Eligibility and Qualifications 

The U.S. Small Business Administration has general requirements for determining eligibility for 7(a) loans and other SBA Working Capital Loans. On top of that, each SBA loan provider often has its own set of rules for determining who to give loans to. 

That's because lenders have to calculate the risk of providing a loan to a particular borrower. To do so, they generally look at four main factors:

  • credit score
  • annual revenue
  • business history
  • collateral

Taking these together helps determine interest rates, the likelihood of keeping up with monthly payments, potential future success, and assets to claim if the loan remains unpaid.

3. Choose an SBA Loan Provider

The SBA doesn't provide loans itself. Instead, they partner with traditional banks and online lenders to provide the loans. Each lender type can have different requirements. 

Tradition banks tend to be more strict in their eligibility requirements. For example, they're unlikely to give out loans to small business owners with low credit scores unless they have a co-signer who will repay if they default. 

On top of that, traditional banks tend to take a long time — a few weeks to a few months — to process loan applications. However, if you are accepted, they can offer low-interest rates. 

Online lenders tend to be more relaxed in their eligibility requirements. For example, they're more likely to give loans to those with lower credit scores. Not only that, but they often do so quickly so you can have your money faster.

However, this convenient process sometimes comes with a higher interest rate.

4. Gather Loan Application Paperwork

Once you've determined your business needs, eligibility, and preferred lender, then it's time to gather the loan application paperwork. 

Although there's no standard set of paperwork required by all lenders, most of them will ask for the following:

  • Financial statements (profit and loss statements, projected financial statements, etc.)
  • Articles of incorporation
  • Business lease
  • Business license
  • Tax returns (both personal and business) 
  • Bank returns (both personal and business)
5. Submit Your SBA Loan Application

This can be done online or in person. Either way, it will require bringing all the loan application paperwork together with other basic information such as social security number, business name, and business Tax ID. 

Once accepted, you have to wait for approval. If your loan is approved, then you should understand the loan terms and conditions, sign the agreement, and begin using your funds. 

Apply for SBA Working Capital Loans with Cornerstone Capital Advisors

Having the working capital to pay for daily expenses is essential for maintaining and growing your small business. If you're running low on finances, then taking out SBA Working Capital Loans can be a lifesaver. 

Before taking out a loan, however, it's important to choose the right SBA loan provider. With 21 years of experience, Cornerstone Capital Advisors has the necessary expertise to help your company survive tough times and continue to grow. Contact us today to see how we can help. 


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